Tony Hazell questions whether Britain is ready to face economic reality after a summer of celebration
After a summer of Olympic and Jubilee joy, Britain must now face up to an autumn of economic reality. But the question puzzling the experts is what exactly is that reality?
On the face of it we are stuck in a nasty recession. Official figures from the Office for National Statistics said the economy contracted by 0.7 per cent in the three months from April to June. Between October last year and June this year it contracted by 1.4 per cent.
But what has got economists scratching their heads is that other figures seem to contradict this gloom. For instance 181,000 jobs were created between April and June – which seems rather strange in a recession. Unemployment in the period fell by 65,000 to 2.58 million.
The UK unemployment rate stands at 8.1 per cent, comfortably below the EU average of 10.1 per cent. Compare that with Spain where 5.7 million – around a quarter of the workforce – are unemployed, and you get a sense that the UK may not be doing quite so badly after all.
Some economic figures are so erratic that senior economists are questioning whether they make any sense at all. Andrew Sentance, a senior economic adviser to PricewaterhouseCoopers and a former member of the Monetary Policy Committee of the Bank of England, wrote in the Sunday Telegraph: "very few people buy into the picture shown by the official statistics".
He attempted to strip out all of the erratic figures including the Jubilee festivities. The result? Well it could be that the economy is actually growing slowly – perhaps by one per cent a year. Other figures also suggest the picture may not be as bleak as the official numbers suggest, leading to speculation that they may later be revised.
The Confederation of British Industry’s (CBI) quarterly Industrial Trends Survey questioned 398 manufacturers about their businesses. Of these, 29 per cent said output was up in the three months to July compared with the previous three months. Only 21 per cent said it was down. In addition, 29 per cent said orders were up against 26 per cent reporting falls. Anna Leach, the CBI’s head of economic analysis, said both demand and production were expected to continue to increase steadily over the current three month period.
There are also some overlooked success stories. Remember the British car industry? Even today the mere mention of it leads many to recall the strike-bound days of the 1970s, but it is one of our great success stories. Last year it exported more than 1.1 million cars – a 14 per cent increase on the previous year. That’s the most cars the UK has ever exported in a year.
Within six years the industry aims to be producing two million cars a year, which would break historic production records. Over the past 18 months the car industry has invested an extra £5.8 billion in the UK, creating precious jobs in the process. Nissan’s Sunderland plant, opened in 1986, is one of Europe’s most productive car plants. Its 5,462 workforce produced 480,485 vehicles last year – or around 88 per head.
Opel/Vauxhall is producing its next Vivaro van in Luton. Rolls Royce sales hit record levels last year. BMW announced an additional £500 million investment in its UK Mini and engine parts. And Toyota announced plans to build its new Auris in the UK. Not bad for an industry many had written off a generation ago.
The big issue facing the UK economy remains the Eurozone crisis because this is our biggest export market. Businesses are also facing higher raw material and oil costs than they would wish because of competition from emerging economies such as China.
There is also the concern that while the Bank of England is pumping money into the economy through quantitative easing, the official figures show there is less money flowing around. Banks might argue that they are caught between a rock and a hard place. On the one hand the Government and businesses are asking them to lend more, while regulators want them to bolster their reserves to make them more stable.
Elsewhere, the news on inflation remains good with the Consumer Prices Index falling from 2.8 per cent in May to 2.4 per cent in June. Cheaper petrol, clothing and footwear were big contributors to the fall. In June 2011 CPI stood at 4.2 per cent.
However, wages are rising more slowly than prices. This is keeping a squeeze on family incomes. Regular pay including bonuses increased on average by 1.8 per cent over the entire year according to the Office for National Statistics.
So if inflation keeps falling it is looking likely that families may once again see real growth in their incomes. And that is something most haven’t experienced since before the financial crisis started.
Every month in My Virgin Money Magazine, Tony Hazell explains what’s currently happening in the economy and how it affects you. To make sure you don’t miss an update, sign up to receive our monthly emails telling you about new magazine content. For more articles on how to make the most of your money, see our Money homepage.
Tony Hazell is a freelance financial journalist. He edited the Daily Mail’s Money Mail section for over 12 years and now writes a weekly column for the newspaper solving readers’ financial dilemmas. He is married with two grown-up stepsons.
These are his personal views and not necessarily those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
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